Valuing information technology infrastructures: a growth options approach |
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Authors: | Qizhi Dai Robert J Kauffman Salvatore T March |
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Affiliation: | (1) LeBow College of Business, Drexel University, Philadelphia, PA, USA;(2) Carlson School of Management, University of Minnesota, Minneapolis, MN, USA;(3) Owen Graduate School of Management, Vanderbilt University, Nashville, TN, USA |
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Abstract: | Decisions to invest in information technology (IT) infrastructure are often made based on an assessment of its immediate value
to the organization. However, an important source of value comes from the fact that such technologies have the potential to
be leveraged in the development of future applications. From a real options perspective, IT infrastructure investments create
growth options that can be exercised if and when an organization decides to develop systems to provide new or enhanced IT
capabilities. We present an analytical model based on real options that shows the process by which this potential is converted
into business value, and discuss middleware as an example technology in this context. We derive managerial implications for
the evaluation of IT infrastructure investments, and the main findings are: (1) the flexibility provided by IT infrastructure
investment is more valuable when uncertainty is higher; (2) the cost advantage that IT infrastructure investment brings about
is amplified by demand volatility for IT-supported products and services; (3) in duopoly competition, the value of IT infrastructure
flexibility increases with the level of product or service substitutability; and (4) when demand volatility is high, inter-firm
competition has a lower impact on the value of IT infrastructure. |
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Keywords: | Business value Flexibility IT investments IT infrastructure Middleware technologies Real options |
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